Value stocks are similar to a house if done up could be sold at a similar price to other houses in the neighbourhood. In more formal terms it’s an equity that tends to trade at a lower price relative to its fundamentals. Common characteristics include a high dividend yield, low price-to-book (P/B) ratio and/or low price-to-earnings (P/E) ratio.
Source MSCI
Changing of the guard of some sectors. Raw materials and energy traditionally priced cheaply in P/B terms are now expensive. However because of the current conditions in the market the growth component has become even more important. Conversely expensive sectors like telecoms have corrected so far that they are looking increasingly like a value play.
Earnings growth estimates favour growth stocks in 2006. According to our forecasts World value stock’s earnings declined in 2002 but then rose in 2003 and in 2004. Growth stocks’ earnings by definition are less sensitive to the economic cycle and have been far less sensitive. For example in 2003 and 2004, earnings growth played heavily in favour of value stocks. In 2005 the differential between the two have contracted remarkably. In 2006 FactSet estimates suggest will be a turning point, with growth earnings outstripping value earnings.
Play the growth stocks! Valuations between growth and value stocks have converged, suggesting the upside for value stocks in Europe is limited. Consequently we expect growth stocks to continue perform robustly the first half of this year.
These views are independent of FactSet Ltd and are proprietary to Bobby Rakhit. For the full report and individual sector reviews and recommendations please contact rakhitreport@yahoo.co.uk.
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